BBM 433

INDIAN FINANCIAL SYSTEM

Prof.Suresha B
M.Com.,MBA.,PGDFM., M.Phil., NET

Associate Professor, Department of Management

Studies, Christ University, Bengaluru - 029

2
Prof.Suresha B, DMS,
Christ University,
Bengaluru

1/30/17

Unit2-Capital Market
15 hrs

Meaning
Classification
Functions
Types

Primary market Secondary market Functioning of various stock exchanges-NSE, BSE, OTCEI-

Financial instruments in capital market Long term loans market- Derivatives Market- Government
Securities market- Capital market scams-

SEBI-Reforms in capital markets

3
Prof.Suresha B, DMS,
Christ University,
Bengaluru

1/30/17

4
Prof.Suresha B, DMS,
Christ University,
Bengaluru

1/30/17

Indian Capital Market

Organized Indian Financial

System
Regulator
s

Financial
Instruments

Forex
Market

Financial
Markets

Capital
Market

Money
Market

Primary Market
Secondary Market

Money Market
Instrument

Capital Market
Instrument

Financial
Intermediarie
s
Credit
Market

Money Market Vs Capital

Market

It is for short term

Supplies funds for
WC
Instruments are T-bill,
CP, etc.
Each single
instrument is of large
amount

It is for long term

Supplies funds for fixed
capital requirement
Instruments are shares,
debentures, etc.
Each single instrument is of
small amount

Conti..

These
instruments do
not have
secondary
market.
Transactions are
on over phone
and no formal
place
Transaction
without the help

These
instruments have
secondary
market.
Transactions are
at formal place.
Eg stock market.
Transaction have
to be conducted
with the help of
broker.

Why Capital Markets Exist

Capital markets facilitate the transfer of

capital (i.e. financial) assets from one
owner to another.
They provide liquidity.
Liquidity refers to how easily an asset
can be transferred without loss of
value.
A side benefit of capital markets is that
the transaction price provides a
measure of the value of the asset.

Role of Capital Markets

Mobilization of Savings & acceleration of

Capital Formation
Promotion of Industrial Growth
Raising of long term Capital
Ready & Continuous Markets
Proper Channelisation of Funds
Provision of a variety of Services

Functions of a capital
market
Disseminate information efficiently
Enable quick valuation of financial
instruments both equity and debt
Provide insurance against market risk
or price risk
Enable wider participation
Provide operational efficiency
through
-simplified transaction procedure
- lowering settlement timings and
- lowering transaction costs

Develop integration among

-real sector and financial sector
-equity and debt instruments
-long term and short term funds
-Private sector and government sector
and
-Domestic funds and external funds
Direct the flow of funds into efficient
channels through
-investment
-disinvestment
-reinvestment

Factors contributing to
growth of Indian Capital
Market
Establishment of Development banks &
Industrial financial institution.
Legislative measures
Growing public confidence
Increasing awareness of investment
opportunities

Growth of underwriting business

Setting up of SEBI
Mutual Funds
Credit Rating Agencies

Indian Capital Market Historical perspective

Stock Market was for a privileged few

Archaic systems - Out cry method

Lack of Transparency - High tones costs

No use of Technology

Outdated banking system

Volumes - less than Rs. 300 cr per day

No settlement guarantee mechanism High risks

Indian Capital markets Chronology

1994-Equity Trading commences on NSE

1995-All Trading goes Electronic
1996- Depository comes in to existence
1999- FIIs Participation- Globalisation
2000- over 80% trades in Demat form
2001- Major Stocks move to Rolling Sett
2003- T+2 settlements in all stocks
2003 - Demutualisation of Exchanges

Capital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001

Screen based Trading through NSE
Capital adequacy norms stipulated
Dematerialization of Shares - risks of fraudulent
paper eliminated
Entry of Foreign Investors
Investor awareness programs
Rolling settlements
Inter-action between banking and exchanges

CAPITAL MARKET REFORMS

IN INDIA

The 1990s have witnessed the

emergence of the securities market
as a major source of finance for trade
and industry in India.
A growing number of companies
have been accessing the securities
market rather than depending on
loans from financial institutions /
banks.
The corporate sector is increasingly
depending on external sources for

Reforms / Initiatives post

2000

Corporatisation of exchange
memberships
Banning of Badla / ALBM
Introduction of Derivative products Index / Stock Futures & Options
Reforms/Changes in the margining
system
STP - electronic contracts
Margin Lending
Securities Lending

MARKET STRUCTURE
(JULY 31, 2014)

2 National Level Stock Exchanges,

Over 10000 Electronic Terminals at over 400
locations all over India.
9108 Stock Brokers and 14582 Sub brokers
9644 Listed Companies
2 Depositories and 483 Depository Participants
128 Merchant Bankers, 59 Underwriters
34 Debenture Trustees, 96 Portfolio Managers
83 Registrars & Transfer Agents, 59 Bankers to
Issue
4 Credit Rating Agencies

Global capital market

Perspectives

Features of Primary
market

A primary market is one that issues new

securities on an exchange.
The primary markets are where investors
can get first crack at a new security
issuance.
The issuing company offers its equity to
investors or groups and receives cash
proceeds from the sale, which is then
used to fund operations or expand the
business.
It is the largest source of funds with long
or indefinite maturity for the company.

Also known as "new issue

market" (NIM), Primary
markets are facilitate
companies, governments and
other groups to obtain finance
through debt or equity based
securities.

Primary Market

Market for new issues/fresh

capital (IPOs)
New issues mkt.
Participants
issuer
investors
intermediaries

Mobilization of funds
-

Prospectus
Right issues and
Private placement

Free pricing regime

Before 1992,Regulator of new issues was CCI

(Controller of Capital Issues)

Approval from CCI for raising funds in primary mkt.

Timing, quantum ,and pricing of the issue were decided

by the controller

New co.s can issue shares only at par

Existing companies with substantial reserves could

issue shares at premium

Fixed price mechanism resulted in under pricing of

many issues

After 1992, promoter and merchant banker together

decide the price of the issue.

Fixed price mechanism of

new issue

CCI regime
To offer share at a fixed price
Firm and merchant banker decide an
offer price
Investor opinion wasnt considered
while setting offer price
Long time lag among the date of
pricing, the date the issue opens ,and
the date when trading commences
Raises possibility of price fluctuations in
intervening period

Book Building-A new issue

mechanism in India

mechanism through which an

offer price for IPOs based on
investors demand is
determined .
Auction of shares

Book Building at NSE

NSE's vast network provide an important

infrastructure backbone for conducting online
IPOs through the Book Building process.
Issuers can access the various markets situated
in the most remote areas of the country, through
the NSE's Book Building process called NEAT IPO.
NSE's reverse Book building mechanism offer
issuing company to buy-back company stock
from the market. The NSE system offers a nation
wide bidding facility in securities.

Book building process

1.
2.

3.

4.

5.

Appointment of book runner i.e.

merchant banker
Preparation and submission of draft
documents to SEBI and obtaining of
an acknowledgement card.
A specified price band (range) is to be
determined by issuer and book
runner
Different price levels are invited from
syndicate members .Adv. Should
mention opening and closing dates for
the bids
Issuer arrives at a final cut-off rate &
final allocation in consultation with
book runner and lead manager

Contd..
6.Issuer and book runner may
impose restrictions on number of
shares that can be allotted to each
client
7. Final prospectus is filed with the
(ROC) along with procurement
agreement
8.Placement portion opens for
subscription
9.Placement portion closes a day
before the opening of public issue
portion

Book building options

75% book building
Issue can be categorized into
-placement portion
- Public portion (net offer to the
public)
100% book building

Limitations of book
building method

No road shows done

Still dependent on good faith
No. of investors invited to apply are limited
Lack of transparency
Not proved to be good price discovery
mechanism
Lag time of more than 60 days between issue
pricing and listing
Issuer may have to sell cheap due to collective
bargaining
High institution holding may affect stocks
liquidity
Volatility may increase due to bulk offloading

Distinction between
Primary and Secondary
Market

Functional differences
Organizational differences
Nature of contributions to
industrial finance

Secondary Market

Secondary/Stock
market!!!!

JARGON OF EQUITY
MARKET:

SECURITY

BOND

STOCK
1)COMMON STOCKS
2)PREFERRED STOCKS

SHARE

MUTUAL FUNDS.

PAR VALUE vs. MARKET VALUE

BULLISH vs. BEARISH

How does the stock market function?

Stock exchanges
Brokers
Registrars
Depositories and their participants
Securities and Exchange Board of India (SEBI)
Financial Regulators
SEBI
RBI
Ministry of finance

The role of the stock exchange

Corporate governance
Creates investment opportunities for
small investor
Government raises capital for
development projects
Barometer of the economy

Functions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.

It enhances investor's knowledge on market by providing education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation

Functions Of RBI
Monetary Authority:
Issuer of currency:

Regulator and supervisor of the financial system:

Authority On Foreign Exchange:
Developmental role:
Related Functions:

WHY STOCK PRICE RISES?

The price of every stock increases or decreases for
the following possible reasons:
News about company.
News about the country.
Exchange rate regime.
Depends on demand and supply for that stock.

DRAWBACKS OF INDIAN STOCK MARKET:

Unethical practices.
Big irrational greed, excessive speculation.
Lack of protection to interests of the genuine and small
investors.
Trading is extremely thin and restricted.
Structural and organizational imbalance in the growth of
the
stock market.
Volatility of the market has increased over the years.

HOW TO MAKE MONEY

FROM CAITAL MARKET?
patience, profound knowledge.
Best guess.
Diversification .
Portfolio
management.

Indian Capital Market

deficiencies

Lack of transparency
Physical settlement
Variety of manipulative practices
Institutional deficiencies
Insider trading

8 scams that rattled the

Indian stock market

Harshad Mehta scam - Rs 4,000 crore Conviction sentenced 5 years rigorous imprisonment and a fine of 25000.
CRB Scam - Rs 1,200 crore - Bhansali spent three months in
jail in 1997. He is out now but nobody knows where he lives
and if they do, they are not snitching.
Ketan Parekh Scam - Rs 800 crore - Conviction - 1 year
sentence.
Satyam Scam - Rs 14,162 crore case is going on
Sahara Housing Bonds - Rs 24,029 crore - case is going on
Speak Asia - Rs 2,200 crore - investigation is going on
Saradha Scam - Rs 10,000 crore investigation is going on
NSEL Scam - Rs 5,600 crore - investigation is going on

Benjamin Graham (real name Grossbaum) (May

8, 1894 September 21, 1976) was a Britishborn American professional investor. Graham is
considered the father of value investing, an
investment approach he began teaching at
Columbia Business School in 1928 and
subsequently refined with David Dodd through
various editions of their famous book Security
Analysis.

Worlds major stock markets

WORLD MARKET TIMINGS

Apart from this, global trends in stocks also affect the Indian
market when it opens. Heres a list of opening time of stock
markets
around
the world.
Shanghai stock exchange
Opens
at 7.30 Am

On March 23, 2012, President Barack

Obama announced that the United States
would nominate Jim Yong Kim as the next
president of the World Bank to replace
Robert Zoellick. On April 16, Kim was
elected to head the World Bank and took
office on July 1.

Indian Capital Market

Market

Instruments

Intermediaries Regulator
SEBI

Primary

Secondary

Equity

CRA

Brokers
Investment Bankers
Stock Exchanges
Underwriters
Hybrid

Corporate Intermediaries

Individual

Debt

Banks/FI

Players

FDI /FII

Bombay Stock Exchange

Stock Exchanges in INDIA

Mangalore Stock
Exchange
Hyderabad Stock
Exchange
Uttar Pradesh Stock
Exchange
Coimbatore Stock
Exchange
Cochin Stock Exchange
Bangalore Stock
Exchange
Saurashtra Kutch Stock
Exchange
Pune Stock Exchange
National Stock Exchange
OTC Exchange of India
Calcutta Stock Exchange
Inter-connected Stock
Exchange (NEW)

Madhya Pradesh Stock

Exchange

Vadodara Stock
Exchange

The Ahmedabad Stock

Exchange

Magadh Stock Exchange

Gauhati Stock Exchange

Bhubaneswar Stock
Exchange

Jaipur Stock Exchange

Delhi Stock Exchange

Assoc

Ludhiana Stock
Exchange

SECURITIES AND EXCHANGE

BOARD OF INDIA(SEBI)

SENSEX

What is SENSEX?
The Sensex is the
abbreviated form of
BSE-sensitive index, is a
free
float
market
capitalization weighted
index of 30 stocks
representing a sample of
large well established
and financially sound
companies.

History of SENSEX
Sensex, first compiled in 1986,
is an index of BSE, situated in
financial capital of India
(Mumbai) was calculated on a
Market
Capitalizationweighted methodology of 30
component
stocks.
Since
September 1, 2003, SENSEX
is being calculated on freefloat market capitalization
methodology.

Objective of SENSEX
The SENSEX is the benchmark index of Indian capital market
with wide acceptance among individual investors, institutional
investors, foreign investors and fund managers.
Main objectives are:To measure market movements.
Benchmark for fund performance.
For index based derivative products.

Key points of BSE

Base year
Base index value
Date of launch
Method of calculation

1978-79
100
01-01-1986

No of scrips

30

Index calculation
frequency

15 seconds

Launched on full market capitalization method

shifted to free floated market capitalization.

Objective Of SENSEX

To measure market movements

Given its long history and its wide acceptance, no other index
matches the SENSEX in reflecting market movements and
sentiments. SENSEX is widely used to describe the mood in the
Indian Stock markets.
Benchmark for funds performance
The inclusion of blue chip companies and the wide and balanced
industry representation in the SENSEX makes it the ideal
benchmark for fund managers to compare the performance of their
funds.
For index based derivative products
Institutional investors, money managers and small investors all
refer to the SENSEX for their specific purposes The SENSEX is in
effect the proxy for the Indian stock markets. The country's first
derivative product i.e. Index-Futures was launched on SENSEX.

Criteria for listing of scrips

Quantitative criteria: Market capitalization
Liquidity
Trading frequency
Number of trades
Value of share traded
Industry representation
Listed history
Qualitative criteria: Track record

Market Capitalization
The scrip should figure in the top 100 companies
listed by market capitalization. Also market
capitalization of each scrip should be more than
0.5 % of the total market capitalization of the
Index i.e. the minimum weight should be 0.5 %.
Since the SENSEX is a market capitalization
weighted index, this is one of the primary criteria
for scrip selection.

Liquidity
Trading Frequency: The scrip should have been traded
on each and every trading day for the last one year.
Exceptions can be made for extreme reasons like scrip
suspension etc.
Number of Trades: The scrip should be among the top
150 companies listed by average number of trades per day
for the last one year.
Value of Shares Traded: The scrip should be among the
top 150 companies listed by average value of shares
traded per day for the last one year.

Industry Representation & Listed

History
Industry
Representation:
Industry
Representation:
Scrip selection would take into account a balanced representation
of
the listed
companies
in the
universe
of BSE. The
index
Scrip
selection
would
take
into account
a balanced
companies
shouldof
bethe
leaders
in their
industry group.
representation
listed
companies
in the universe

of BSE.
The index
Listed
History:

companies should be leaders in

their industry group.

The scrip should have a listing history of at least one year on

BSE.

Listed History:

The scrip should have a listing history of at least one

year on BSE.

Who are Bulls & Bears

Those who buy
shares
in
anticipation of
increase
in
prices
are
commonly
referred to as
bulls And those
who sell shares
anticipating
a
fall in prices are
referred to as
bears.

SEBI- GENESIS
SEBI is the regulator for the Securities Market in
India.
In 1988 SEBI was established by the Government
of India through an executive resolution, and was
subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with
the passing of the Securities and Exchange Board
of India Act (SEBI Act) on 30th January 1992.
The SEBI was established on April 12, 1992.
In place of Government Control, a statutory and
autonomous regulatory board with defined
responsibilities, to cover both development &
regulation of the market, and independent
powers have been set up.
Paradoxically this is a positive outcome of the
Securities Scam of 1990-91.

SEBI
Chaired by U K Sinha, SEBI is headquartered in
the popular business district of BKC in Mumbai,
and has Northern, Eastern, Southern and Western
regional offices in New Delhi, Kolkata. Chennai,
and Ahmadabad.

SEBI- PREAMBLE
The Preamble of the SEBI describes the
basic functions of the Securities and
Exchange Board of India as
..to protect the interests of
investors in securities and to promote
the development of, and to regulate
the securities market and for matters
connected therewith or incidental
thereto

SEBI- Basic objectives

To protect the interests of investors
in securities.
To promote the development of
Securities Market.
To regulate the securities market.
For matters connected therewith or
incidental thereto.

SEBI- Major Contributions

Since its inception, SEBI has been working
targeting the securities and is attending to the
fulfillment of its objectives with commendable zeal
and dexterity.
The improvements in the securities markets like
capitalization
requirements,
margining,
establishment of clearing corporations, Demat,
etc. reduced the risk of credit and also reduced the
market risk.
SEBI has introduced the comprehensive regulatory
measures, prescribed registration norms, the
eligibility criteria, the code of obligations and the
code of conduct for different intermediaries like,
bankers to issue, merchant bankers, brokers and
sub-brokers, registrars, portfolio managers, credit
rating agencies, underwriters and others.

SEBI- Major Contributions

It has framed bye-laws, risk identification and risk
management systems for Clearing houses of
stock exchanges, surveillance system etc. which
has made dealing in securities both safe and
transparent to the end investor.
Another significant event is the approval of
trading in stock indices (like S&P CNX Nifty &
Sensex) in 2000.
A market Index is a convenient and effective
product because of the following reasons:
- It acts as a barometer for market behavior;
- It is used to benchmark portfolio performance;
- It is used in derivative instruments like index
futures and
Index options

SEBI- Contributions
Two broad approaches of SEBI is to integrate the
securities market at the national level, and also to
diversify the trading products, so that there is an
increase in number of traders including banks,
financial
institutions,
insurance
companies,
mutual funds, primary dealers etc. to transact
through the Exchanges.
In this context the introduction of derivatives
trading
through
Indian
Stock
Exchanges
permitted by SEBI in 2000 is a real landmark.
SEBI has enjoyed success as a regulator by
pushing systemic reforms aggressively and
successively (e.g. the quick movement towards
making the markets electronic and paperless
rolling settlement on T+2 basis

SEBI- Functions and

Responsibilities

SEBI has to be responsive to the needs of

three groups, which constitute the market:
- The issuers of securities
- The investors
- The market intermediaries.
SEBI has three functions rolled into one
body quasi legislative, quasi-judicial and
quasi-executive.
It drafts regulations in its legislative
capacity
- It conducts investigation and enforcement
action in its
executive function and it passes rulings and
orders in its
judicial capacity.

Powers and Functions of SEBI

Regulating the business in stock exchanges and
any other securities markets.
Registering and regulating the working of stock
brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds,
registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment
advisers and such other intermediaries who may
be associated with securities markets in any
manner.
Registering and regulating the working of the
depositories, custodians of securities, foreign
institutional investors, credit rating agencies and
such other intermediaries as the Board may, by
notification, specify in this behalf.

Powers and Functions of SEBI

Registering and regulating the working of venture
capital funds and including mutual funds.
Promoting and regulating self-regulatory
organisations.
Prohibiting fraudulent and unfair trade practices
relating to securities markets.
Promoting investors' education and training of
intermediaries of securities markets.
Prohibiting insider trading in securities.
Regulating substantial acquisition of shares and
take-over of companies.
Calling for information
from,
undertaking
inspection, conducting inquiries and audits of the
stock exchanges, mutual funds, other persons
associated
with
the
securities
market
intermediaries and self- regulatory organizations

Powers and Functions of SEBI

Calling for information and record from any bank
or any other authority or board or corporation
established or constituted by or under any
Central, State or Provincial Act in respect of any
transaction in securities which is under
investigation or inquiry by the Board.]
Performing such functions and exercising such
powers under the provisions of the Act as may be
delegated to it by the Central Government from
time to time.
Levying fees or other charges for carrying out the
purposes of this section.
Conducting research for the above purposes.
Calling from or furnishing to any such agencies,
as may be specified by the Board, such
information as may be considered necessary by it

Powers and Functions of SEBI

The Board may take measures to undertake
inspection of any book, or register, or other
document or record of any listed public company
or a public company which intends to get its
securities listed on any recognised stock
exchange where the Board has reasonable
grounds to believe that such company has been
indulging in insider trading or fraudulent and
unfair trade practices relating to securities
market.
While exercising the powers under the Act, the
Board shall have the same powers as are vested
in a civil court under the Code of Civil Procedure,
1908 (5 of 1908).

Powers and Functions of SEBI

The Board may, take any of the following
measures:
Suspend the trading of any security in a
recognized stock exchange.
Restrain persons from accessing the securities
market and prohibit any person associated with
securities market to buy, sell or deal in securities.
Suspend any office-bearer of any stock exchange
or self- regulatory organization from holding such
position.
Impound and retain the proceeds or securities in
respect of any transaction which is under
investigation.
Attach for a period not exceeding one month, one
or more bank account or accounts of any
intermediary or any person associated with the

Powers and Functions of SEBI

Direct any intermediary or any person associated
with the securities market in any manner not to
dispose of or alienate an asset forming part of
any transaction which is under investigation.
The Board may take any of the measures in
respect of any listed public company or a public
company which intends to get its securities listed
on any recognized stock exchange where the
Board has reasonable grounds to believe that
such company has been indulging in insider
trading or fraudulent and unfair trade practices
relating to securities market.

SEBI- Conclusion
For the development of any economy, Capital
Market, which is one of the main organ to
mobilize funds of huge order, shall evolve all
steps to develop the market,
simultaneously
bringing in the credibility in the financial market,
which is watched world wide, through effective
and
speedy
implementable
regulations,
ultimately,
protecting the interest of the
Investors and the Country.

OTCEI
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